Constructing jargon in Standard Costing

Accountants have an unusual way of constructing jargon in standard costing. They take up to four common words, mostly nouns, string them together to make an accounting term and then use the initials. Their simplest variance is called Direct Material Cost Variance or DMCV.

Direct is superfluous here because indirect is meaningless in this context. Material brings connotations of textile fabric or importance as in ‘material difference’. Neither of these applies. Nor does the abstract:  ‘she’s certainly college material’.  Material here is the product being used in the factory. Only an accountant could guess. Finally cost is not cost at all, but as I will show later has three or five components.

Then they proceed to make the simple as complicated as possible. A non-accountant would calculate the product variance or DMCV with a simple subtraction. But accountants prefer to have not one result (too easy) but three. And then, they give the three variances, five different names: price, usage, yield, mix and sub-usage. For example they call the last one: Material Sub-usage Variance. Why five names when three would do? Their explanations cover whole chapters in text books.

One of their simpler explanations is: ‘sometimes the usage variance equals the yield variance, but not always’. The ‘not always’ here, requires accounting students to learn an obscure concept called RSQ: Revised Standard Quantity, giving this marvellous formula:

Direct Material Cost Variance = {(RSQ-AQ) X SP} + {(SQ-RSQ) X SP} + {AQ X (SP-AP)}

I note it so you can wonder at its complexity! Mix and yield variances need a chapter on their own. And sub-usage, as an official accounting term, how banal and vague can you get?

I will now move onto the most sophisticated variance: the Overhead Variance. To keep it complicated, accountants invent, not one, but two Overhead Variances: variable and fixed.  Why two you might ask? Management wonders too.

One of the variances becomes the bizarre ‘variable variance’: the Variable Overhead Variance or VOV.  VOV as you might know is an Italian egg liqueur invented by Gian Battista Pezziol, in 1845 well before the accounting profession took it up as an accounting term too. How weird is that?

Accountants then explain the four variances they create for the Fixed Overhead Variance: Fixed Overhead Expenditure Variance, Fixed Overhead Efficiency Variance, Fixed Overhead Volume Variance, and Fixed Overhead Capacity Variance. You can see they again use their unusual jargon technique and string four words together, I suppose in their eyes, to make it consistent.

I often wonder whether this quote by David Ogilvy, the late British advertising tycoon and founder of Ogilvy & Mather, applies to some members of the accounting profession: [1]

Our business is infested with idiots who try to impress by using pretentious jargon”.

[1] Quotation attributed to David Ogilvy by

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